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The Best Growth Stock to Buy Last Year … and This Year

Picking the single best growth stock of the year can be a futile exercise. But my most recent recommendation checks a lot of my personal investing boxes.

For growth stock investors—a group I like to define as those who expect to get a majority of their portfolio’s performance for the year from a small number of stocks—the search for the homerun stock is constant. Successful growth investors know all about cutting losses short, adjusting their buying and cash levels to the market conditions and employing a concentrated portfolio.

But the Holy Grail for the growth investing strategy is still finding the one, two or maybe three best growth stocks to power your portfolio’s gains for the year.

Growth investors often look to previous performance to try to develop a sense of what works in the market, so every year, I write a report on the top performers of the previous year. I restrict my research to stocks with enough liquidity and a high enough price to make them eligible for support from institutional investors. (Penny stocks occasionally produce a few big winners, but then so does playing 00 on the roulette table; the odds just aren’t very good.)

Here’s my write-up of 2015’s top-performing stock.

#1 Eagle Pharmaceuticals (EGRX) 16 to 88.67, +472%

Eagle Pharmaceuticals is a New Jersey-based specialty pharmaceuticals company that focuses on critical care and oncology. The big spike the company experienced in February came from a licensing agreement with Teva to commercialize Eagle’s Bendeka, a bendamustine rapid infusion product. The deal also included up to $90 million in milestone and royalties.

That one piece of good news kicked the stock into high gear and it ran higher all the way to August, when Teva put an immediate lump of $30 million in Eagle’s bank account and profit-taking (and a nasty market correction) took the wind out of its sales. Pharmaceuticals and biopharmas are often heavily represented among the best performing stocks of any year, since one piece of good news from a clinical trial or a tactical hookup with a bigger rival can transform a company’s revenue potential. It’s also worth noting that EGRX’s 472% gain for the year was 222% higher than the next-best performer on the list, which is another reflection of the challenging market that prevailed during the year.

Given the huge margin by which EGRX beat every other stock on the market, you’d have to say that it was the one to own in 2015, even if it traded sideways for the rest of the year after its August high.

Every year, the leader board of top performers is packed with biotech stocks. That’s just what happens when small unprofitable companies that have been working on new drugs for years finally strike it rich. But it’s an unpredictable roll of the dice for investors trying to anticipate who will ring the bell.

So, that’s half of what I promised: last year’s best growth stock to buy.

So, what’s this year’s best growth stock going to be? Long story short, I have no idea. I don’t like picking one stock to buy at any time. It’s like coming up to bat in baseball and being told that you have only one pitch to hit.

But I will tell you three rules that I follow when I’m looking for my next buy in my personal portfolio. That’s as close as I ever come to picking a “stock of the year” (unless our relentless editorial director is demanding one in December for the various publications that print them).

Rule #1: Look for Strength in the Chart. A chart that shows a declining stock price isn’t advertising a bargain sale; it’s telling you that the market doesn’t like the stock. Even a stock that is putting in a bottom after a long decline is still a gamble. A double or triple bottom or a period of flat trading is a good prelude to a rally, but it’s better to wait for the rally itself. A chart with an ascending price is telling you that the market is changing its mind about the stock. That’s the time to buy.

Rule #2: Look for Strength in the Numbers. When you get away from the speculative end of the spectrum, fundamentals do make a difference, and a history of growing revenue and earnings by double-digit percentages is a nice reassurance that the company is well run and that its business plan is working. Note: this probably eliminates most development-phase companies like those pre-profitability biophamaceuticals from your list.

Rule #3: Look for the Elevator Factor. A steady business is nice, but unless there’s some high-potential new product, a possible acquisition or a shift in strategy, there is no catalyst for change. And investors looking for the best growth stock of the year need to see change. I call it the Elevator Factor because it’s the story you would tell someone on an elevator if you were explaining why you like the stock. If you can’t explain the Ruling Reason for your investment between the lobby and the sixth floor, you probably shouldn’t be buying.

My most recent buy for my personal growth portfolio was Silver Wheaton (SLW), a streaming silver company that contracts with miners to buy their silver (and, increasingly, gold) at a specified price. Silver Wheaton provides the financing for exploration and mining, and then owns the rights to the silver at a greatly reduced price.

I’m no gold bug, but the rebound in precious metal prices produced the strength in the chart (see Rule #1), while the company’s history of profitability during the dark years for gold and silver prices satisfies Rule #2. The rise in gold prices is the key for Rule #3.

I don’t really expect SLW to be the best growth stock of the year. It’s more of a low-risk way to take a short ride on the precious metals merry-go-round. I’ll save my swing-for-the-fences money until I see a more robust bull market.

In Cabot Global Stocks Explorer, I’ll let you know when it’s time to put all of your money to work and what are the best stocks to take advantage of the market’s advance. So don’t miss profiting from our advice.

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Fortune Cookie

Here’s this week’s Fortune Cookie.

Tim’s comment: Epicurus trod this earth long before hedge funds and offshore accounts and carried interest, but he had his finger on a basic point of economics; wealth beyond what can be efficiently used in the system is useless.

Paul’s comment: As one economist put it, big fortunes can’t circulate; they get tied up in safes, bank accounts and investments. So from an economic point of view, the biggest objection to “excessive” wealth isn’t fairness, it’s the locking up of financial resources away from the natural flow of the economy. Epicurus was indeed ahead of his time.

Sincerely,

Paul Goodwin

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Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.